Are the high premiums worth it?
Ric Edelman is a co-founder of Edelman Financial Engines. The following is taken from his weekly radio call-in show.
Question: I’m 66 and my wife is 70. Twelve years ago, we purchased long-term care insurance for $765. It went up in 2009 to $902. I just got a letter saying that it’s going up almost 70%. My premium will jump to $1,083 and my wife’s to $1,836. I’ve complained to the company and to the state insurance commission to no avail. That commission is always going to approve these increases, right? The company says it couldn’t anticipate the costs, but I knew 50 years ago that people were living longer, so why can’t these insurance companies figure it out? I now have an appointment with a newspaper reporter to tell my story; I hope he prints it. Meanwhile, do you have any advice? We can’t afford this.
Ric: Well, newspapers are printing this story because it’s a widespread problem, but no, you can’t prevent the increase. Why didn’t the company anticipate the number and size of claims? Here’s why: Life insurance carriers have massive amounts of historical and actuarial data about life expectancies that go back 600 years. They know the odds of you dying at any time, based on numerous factors about your life, and they also know the likelihood that you will keep your policy from one year to the next.
But the long-term care industry goes back only a couple of decades, which means LTC insurers had to make some guesses about whether you’ll file a claim, how long you will live after you do file, how much those benefits will cost and the likelihood you won’t cancel the policy before needing to file a claim. And many of those assumptions were just plain wrong. As a result, the insurance companies are not earning enough in premiums to pay all the claims that are being filed. So they are raising the rates.
Because insurers knew they were making guesses on their actuarial assumptions, they gave themselves the right to raise rates — it’s in your contract. But to actually impose a rate increase, they must get the state insurance commission’s approval. Is that approval a rubber stamp? No, it is not; regulators often reduce or reject price increases. So if an increase is approved, you can be certain that the commissioners believe it is necessary. The alternative is for the insurance company to go out of business — and that’s exactly what many have done.
Yes, the situation stinks. Many consumers have not been aware that rates might increase. And many are seeing much higher increases — like your 70% hike — than anyone expected. Despite all the negatives, it’s good that you have LTC insurance. As advisors, one of the saddest things we see, financially and emotionally, is people needing care and having to deplete all their assets in a few years because they didn’t have coverage. Often a healthy spouse is left impoverished.
Your coverage, despite its cost, is important, and we wouldn’t advise you to get rid of it. If you feel it is unaffordable, see if the insurer will let you reduce the benefits in exchange for lowering the cost. Instead of canceling out of anger and frustration or writing letters to the media and regulators to demand correction — sure, go ahead and do the latter if you like, there’s no harm there — what you really need to do is talk with the insurance agent or financial advisor who sold you the policy.